Something just came to me when I saw that Apple (AAPL) has $9.2B cash on hand. The marquee tech companies have so much cash these days that each has the potential to cross over directly to a rival's turf. However, the rival has so much cash on hand that they could easily quell these aggressive moves. The process reminds me of détente (Wikipedia link), meaning that the cash reserves each company has keeps the other from expanding away from their core focus.

Along with some other tech companies, these cash reserves amount to about $60B. Of course, some of this is earmarked for stock options and retirement programs, but what's left over is certainly huge.

Chances are these companies will be relucant to take on a risky cash-based merger, although eBay did spring for Skype. Rather, these companies would be more likely to use the cash to finance their own internal growth. Buyouts will still happen, but they will be more likely to be of the $25M variety than a multi-billion dollar deal.

It's been awhile since I last speculated on Google's next step, so here goes: I think that Google will launch a Google Health vertical portal next week (at health.google.com?) which will feature free or paid-for hospital and physician ratings compiled by Health Grades, Inc. (www.healthgrades.com).

Why do I say this? First, the USA Today quotes Marissa Mayer, Google's VP of Search Products, as implying that Google will launch a Google Health vertical portal next week. For more information see "Google Health: Probably coming next week".

Of course, I can't really take credit for the USA Today's claim, so let's move on to my prediction that Health Grades, Inc., will play a role. Simply put, Health Grades is a virtually unknown service where people can get ratings on hospitals and physicians, including quality ratings, board certifications, patient opinions, and other measures. Thus, being the ONLY broad provider of such information, they could play a vital role in Google Health. Health Grades recently announced a similar deal with Tenet Healthcare in which it will provide free ratings for which it expects to gain a significant amount of revenue.

By the way, the stock for Health Grades, Inc. (NASDAQ ticker HGRD) is a profitable company expecting revenue growth of 40% in 2006 with margins increasing to 25% or more. In the past week their stock jumped from a low of $3.20/share to a high of near $4.80/share before ending Friday at $4.59/share. In the past year, HGRD traded as high as $7.01 in the period immediately after the stock was added to NASDAQ. As of Friday, HGRD's market cap was about $130M which interestingly is almost exactly 0.1% of Google's total value.

To follow-up a recent post called Google's stock price doesn't matter, I just wanted to spend a minute looking at online advertising revenue projections. Publicis’ ZenithOptimedia says that online ad revenues in the US in 2005 will come in at around $16.4B while TV ad spend will amount to about $148.2B.

Looking to the future, Forrester analyst Charlene Li forecasts that online ad revenue in 2010 will be about $26B in the US. Of course, these figures exclude revenue outside of the US. Google is best poised to capitalize on international expansion (as indicated by Global implications of the $50 PC).

Unfortunately, these articles do not clearly state if paid search is included so I'll assume it is not. If paid search accounts for as much revenue as online ads, then total online marketing spend in the US is about $33B and about $67B globally.

Taking an extremely aggressive and optimistic view of Google, I'd like to do a "blue sky" valuation of Google's potential 5-year appreciation. Google's 2005 revenues should come in at around $4B. If I make a mostly baseless assumption that online marketing revenues will be about $100B in 2010. Since Google is best poised to capture international expansion and if we aggressively assume that Google will capture 40% of all online marketing spend by that year, then Google could captures $40B in revenue, or about 10 times what Google is seeing for revenue in 2005.

If true, this could mean that Google's stock price could increase from the current level of $420 per share to about $4200 per share in 2010.

Again, this is extremely aggressive. In any case, Google's current price of $420 is a fair short-term valuation. Any longer-term valuation that assumes Google will dominate online marketing will likely result in a present day valuation higher than $420.

There are many who think this way. The truth is that share price does not matter in isolation. What matters is the combination of share price and shares issued. Multiplying the two results in market valuation. If Google had decided to issue 100 times the amount of shares they had issued at a price target of about $0.85 per share, would the naysayers be saying "Google will never top $5.00 per share?" No.

To be fair, some Digg members are also astute financially. Here's a wise comment from hammerattack:

Anyone who says Google's stock is overvalued, or that they're in a bubble, is utterly unqualified to even comment. The per share price of the stock is largely irrelevant, and when you look at the multiple then consider their revenue and profit, you can see that the company is quite healthy. And that's the bottom line for an investor right now is how healthy they are. For future investors, they look at how healthy a company is going to be. Google is making massive investments in R&D which have and will result in real technologies.

Then there are comments like:

GOOG's trading at 90x earnings. MSFT's at 23x. MSFT has almost 11B free cashflow. GOOG has around 830M.

This shows insight, but the person is talking about trailing earnings. It's safe to talk about Microsoft's earnings this way since they haven't increased much in the past few years (click graphic to view Microsoft's lame stock performance over the past few years). But this doesn't make sense for Google since earnings keep increasing higher than expectations. In fact, Google is priced at 50.0 times forward earnings, compared to 56.7 for Yahoo. The fact that Microsoft is priced at 18.4 times forward earnings indicates the market does not think Microsoft will be able to significantly increase earnings. Yes, Microsoft has a huge cash flow which they could use for acquisitions, paying dividends, or using internally. But in 2 years we may see Google's free cash flow at $5B or more while Microsoft's may drop to $5B. Digg user dcasez puts this very eloquently:

Microsoft... interesting stock. If you look at what they've done the last 5 years (stock price) you realize how good of an investment they have been since 2000. Basically nothing. I don't think free cash flow matters as much as Talent, and Google I'm afraid has talent lining up to join them. Just like Microsoft had talent lining up to join them in the early 90's.Not to say that Microsoft stock will not go up (it very well might), but I wouldn't judge a stock based on its free cash. Its whats under the hood of the company (the people) that will ultimately make or break a company.

Finally, there are some comments like:

Who's buying this stock at +$400? That's the question. I'm pretty sure it's not mom & pop (either directly or via investment funds). So... that leaves investment banks who were left out in the cold during the IPO.

Let's see... Would this person be more likely to buy 1 share of Google at $400 or 10 shares of Yahoo at $40? You see, it really doesn't matter. In fact, as I pointed out above, Yahoo is actually selling at a premium compared to forward earnings multiples. And you'd be paying the same total commission fees at brokerages like Ameritrade.

Lots of confusion about Google's stock price, but some people do "get it".

However, since then (and it was only 7 weeks ago that I first covered CNTF in a posting called China stock China Techfaith Wireless (CNTF) started with a buy rating) two new analysts have started covering the stock with valuations slightly higher than the Kaufman Brothers report. In addition, despite several Chinese company not meeting their earnings expectations this past quarter due to rising marketing costs, CNTF met expectations and expects a healthy 2006.

In fact, CNTF's stock price is up nearly 70% since I first covered the stock. Further, if you look at CNTF's volume (see stock price link), you can see that the stock has now been "discovered". Speculation about the stock could drive the price up further, so anyone who was lucky to get in before the stock was discovered is enjoying the healthy valuation now. On that note, CNTF's forward P/E is 12.70, further lending credibility to CNTF's possibility to further appreciate.

The 3 analysts covering CNTF have assigned valuations of $17, $15 and $14.60 with 2 recommendations of Strong Buy and 1 Buy.

OK, so now that I've hyped the stock, perhaps I should add my two cents. China Techfaith Wireless is leading China in developing 3G cellular phones. Since China is a late bloomer, people don't make enough money to buy PC's, and most Chinese use cell phones to use the internet, CNTF stands to gain from a broad array of Chinese trends.

Here's an update to my previous Cryptologic (CRYP) recommendation ("Cryptologic is way underpriced"). Jim Gillies of The Motley Fool agrees, saying Cryptologic is undervalued (pegging its fair value at $26 using a conservative DCF model), continues to grow very strongly, and has gobs of cash on hand even after trying to get rid of some of it. So how did Cryptologic give away cash and yet now have more on hand? Besides free cashflow, they also win from a stock buyback at $15 (the stock is now at $20). Here's how The Motley Fool explains it:

CryptoLogic has long been a tremendous cash generator -- a nice problem to have. At the end of 2004, the balance sheet housed $86 million in cash and equivalents. After spending $2.1 million in dividends, $3.3 million on the special investment program, $7.6 million on regular capital spending, and $8.9 million on bargain-priced shares, there remains ... $88.5 million in cash and equivalents year to date. Perhaps it should come as no surprise that management raised the dividend again to $0.28 a share, or 1.3% annually. Those who took the opportunity to buy at the shares' sub-$15 nadir are getting nearly 2% on their money.

Today, Cryptologic announced that YTD revenues are up 100% over last year. Also, they gave some parameters around the potential loss of Betfair as a client. Cryptologic and Betfair will extend their relationship through 2006. Here is a key statement from the press release:

WagerLogic's central poker room, shared by all of its poker licensees, continues to be one of the fastest-growing poker rooms on the Internet. Excluding Betfair, revenue from WagerLogic's other poker licensees is up approximately 100% on a year-to-date basis over the same period in 2004. Although Betfair fees have typically accounted for 5-10% of the company's revenue, CryptoLogic expects to continue its record of profitable growth from strong poker revenue from continuing licensees, healthy results from its core casino business, and the potential signing of new licensees that meet the company's rigorous criteria.

A warning about the Betfair relationship sent Cryptologic stock diving from around $30 back in August to the current level of $16. As the Motley Fool pointed out back in August ("We Told You Small Caps Are Volatile"), the market reaction was way overblown. The press release indicates other growth has more than compensated for the loss of Betfair in 2007 - and Cryptologic will still gain $3-5M in revenue from Betfair in 2006.